Is Payroll Tax Increase Beginning to Affect Consumers?

SymphonyIRI seeing subtle shifts in CPG shopper behavior

February 11, 2013

CHICAGO -- For a consumer with household income of $40,000, the 2% increase in the payroll tax represents $800 in reduced spending power per year, according to Symphony Consulting, a business unit of SymphonyIRI Group Inc. This can be the difference between shopping at a lower-cost dollar store versus a mass merchandiser, increasing purchases of a store brand versus a national brand, or suppressing an impulse to pick up a snack on the spur of the moment while shopping in the store.

Symphony Consulting has completed an initial analysis of shopper behavior since Jan. 1 when the payroll tax increased. The analysis focuses on the impact of the payroll tax increase on food and beverage consumption, including its impact on key dimensions, such as type of stores shopped, type of brands bought (store brands versus national brands) and the effect on various segments and categories.

SymphonyIRI is a global leader in innovative solutions and services for consumer, retail and healthcare companies. Every month, it tracks more than $50 billion dollars worth of consumer packaged goods (CPG) sold through a variety of stores, including grocery, mass merchandiser, dollar and convenience stores.

"To date, shifts in shopper behavior are subtle, but patterns are emerging that deserve close and ongoing scrutiny," said managing director of Symphony Consulting, Dr. Krishnakumar (KK) S. Davey. "Our initial analysis offers highly current data on shopper behavior that will form the basis for ongoing research into the impact of the payroll tax increase."

Comparing dollar sales growth in food and beverages in the first four weeks of 2013 to the last four weeks of 2012 reveals little change in shopper behavior; sales growth remained constant at 2.1% in this timeframe, and food inflation growth decreased to 1% from 1.4%. However, in the last week of the month, discretionary categories across all outlets experienced some softness. SymphonyIRI defined each growth statistic as performance in the given period as compared to the same period one year ago.

Private label (store brand) dollar sales increased slightly in the first four weeks of 2013 over the last four weeks of 2012, to 2% from 1%, picking up the pace in the last week of the month.

Symphony Consulting's granular analysis reveals evidence of softness in shopper purchases along some key dimensions. Dollar sales growth for all channels remained constant at 2.1% in the first four weeks of 2013 and the last four weeks of 2012. However, dollar sales growth at mass merchandisers decreased to 3.3% from 5.3% in this timeframe. It appears that dollar stores have picked up some business from mass merchandisers. Club store dollar sales growth also registered a similar decline.

Changes in behavior by income group indicate a slow down for a subset of the population. The growth rate among middle-income shoppers decreased slightly (40 basis points). As expected, there was no significant change among high-income shoppers. Contradicting expectations, dollar sales growth among low-income shoppers increased, albeit by a small percentage (50 basis points). This could perhaps be attributed to increased in-home consumption versus eating out.

When examined by category, shopper behavior reveals interesting patterns. Dollar sales growth of several categories exhibited declines, including in snacks (down 230 basis points) and beverages, such as coffee and tea (2-110 basis points). Cooking ingredients and beverages, such as juices and drinks, on the other hand, showed growth. Despite across-the-board over-performance in the first four weeks of 2013, discretionary categories lagged total food and beverage in the last week of January 2013, with dollar sales growth of 1.9% compared to 2.5% for the category as a whole in the same period. This could be due to the end of month effect when households optimized their grocery spending as a result of shrinking wallets.

"We expect payroll tax increases will impact non-CPG spending (such as gas, clothes, entertainment) potentially more than CPG spending; however, out-of-home consumption will likely drop, and specifically out-of-home breakfast categories will be negatively impacted," said Davey. "Consumers usually eliminate the out-of-home breakfast meal first when they cut spending. Economic growth is expected to be stagnant due to tax increases and continued high unemployment. Moreover, the recent significant spike in gas prices is going to further squeeze the consumer's wallet. Some stores, convenience stores in particular, are very sensitive to gas price increases."

"Our data focuses on the $35 billion food and beverage segment of CPG," Davey said. "It is clear it will take time for shopper behavior to more comprehensively reflect the impact of the payroll tax increase. After all, most consumers have received only one paycheck during the time of this analysis. It is possible that the dollar sales declines we observed toward the end of January will continue, and Symphony Consulting will update its analysis continuously to provide quantitative, statistically-significant information on shoppers' reaction to this tax increase."

Chicago-based SymphonyIRI Group is a global leader in innovative solutions and services for the CPG, retail and healthcare industries.

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